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Will we see more of the same in 2019?

John Redwood, Charles Stanley’s Chief Global Economist, looks at market prospects for next year after a shaky end to 2018.

byJohn Redwood

in Features

18.12.2018

Many people want a new year to be the harbinger of something better. That is certainly true of investors, after a weak ending to 2018. The investment commentator often concludes that there is no special significance in the date of January 1st. It is usually safer to forecast more of the same. All those New Year’s resolutions may be well meant. People may start with a more positive attitude after the festivities of Christmas and New Year’s Eve, but they face the same intransigent facts on return to the office.

The background to 2018 investment is quite simple. The US-led markets upwards based on the recovery of commercial banks, new credit for people to buy cars and homes, and for businesses to expand, and the tax cuts the President offered. A wave of destructive innovation through the digital revolution had its origins in the US and spawned a group of world-conquering fast-growing companies that people needed to put into their portfolios. Shares responded well until the US central bank applied the brakes more, raising interest rates several times and threatening further rises. The dollar rose on the back of Fed action, causing difficulties in some emerging market economies which rely substantially on borrowing in dollars.

The Fed tightened money more by adopting its policy of so called normalisation, cancelling some of the government debt its owns and the money it created to buy bonds up, to reduce the size of its balance sheet. The Bank of England has also stopped all new quantitative easing and put up rates twice. The European Central Bank has said it will stop all new quantitative easing from the end of this year, and even the Bank of Japan has been reducing the amount of government debt it buys. The Chinese were busy trying to tidy up stretched balance sheets of some of their commercial banks and other financial institutions, inducing a decline in money growth in the world’s second-largest economy as well. This background has naturally hit share prices, and forced the interest rate on long bonds overall a bit higher.

So, the issue for any 2019 forecast is will the central banks carry on doing more of the same, or will they wake up in the new year to the need to ease things a bit to avoid a slowdown turning into a recession? So far they look intent on their policy of “normalisation”. Quantitative tightening is in full swing. The interest-rate sensitive areas of consumer spending have been hit. Car sales have fallen in the US and China, and been badly hit in the UK where additional taxes added to the problems. Home sales are off the top in the US and under various controls in China. Surveys suggest a general slowdown will occur in the US, in the EU and in China as we advance into 2019. The markets have been discounting this with their falls in late 2018.

It does, however, seem likely that as 2019 opens the authorities will be considering a change of stance. The Chinese are looking at plans to cut taxes and offer a fiscal boost to keep their economy going. They are concerned about the damage the US attack upon trade will have on their export-oriented economy and are proposing more domestic stimulus. The Fed may decide to be back away from several more rate rises in 2019 given the absence of any obvious inflationary threat. The European Central Bank is likely to avoid a rate rise at all in 2019. It may be that by March 1 China will have offered enough on tariffs, market opening and intellectual property to persuade Mr Trump to close a deal, which would help sentiment.

If the authorities do not give a bit, then we will continue with people worrying that a slowdown will become a stall for the world economy. It is difficult maintaining confidence, and share markets will be the first to suffer. On balance, we think the Fed and the other leading central banks will want to avoid an early recession, and the governments will edge towards fiscal stimulus. Voters want more public spending and some tax cuts, so they imply they can live with a bit more borrowing. The French President has had to concede some ground on tax and real incomes. The UK government announced a bit of fiscal relaxation at the last budget. The Chinese will probably spend more and tax less next year. All this may be enough for us to muddle through without a recession in any major economy and without a full blown bear market. Meanwhile shares have just got cheaper, and look ready for a rally when some of this possible good news is announced.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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